The folly of Maryland's sin taxes
Originally Published in the Cecil Whig
For a concise lesson on how Maryland's high taxes affect regional alcohol and tobacco sales, simply drive north on Route 13 through the Delmarva Peninsula. As you leave Virginia, the last sign you see before crossing the border into Maryland says, "Last chance for cheap smokes." Forty-two miles later, as you enter into Delmar, Del., you are greeted with a large sign for a liquor store named Tax Free Liquors, conveniently located about 100 yards over the border.
These businesses are appealing to Maryland consumers who want to avoid the state's high taxes on alcohol and tobacco. The recent hikes in both alcohol and tobacco taxes have been great for out-of-state businesses bordering Maryland and bad for Maryland businesses that border other states. That's something that should trouble Maryland policymakers.
Although the new alcohol tax increase is only a few months old, anecdotal evidence suggests that liquor stores inside Maryland's border have seen substantial drops in business. This is especially notable in Cecil County. This county has the highest per-capita distilled spirit consumption in the state, more than doubling almost every other county. Cecil's beer consumption is the second-highest in the state.
It's unlikely that the residents of Cecil County drink substantially more than residents in other counties. Instead, county liquor stores get a lot of customers from across the border. Or, at least, they used to lure these out-of-state customers. With Maryland's new alcohol tax, it's likely that many aren't venturing across the border for their alcohol. This drop in business means fewer jobs and less economic activity in Maryland.
Every six-pack of beer purchased in Delaware or bottle of vodka purchased in Pennsylvania means less tax revenue for the state of Maryland. The preliminary numbers from the alcohol sales tax increase that went into effect on July 1 indicate it will generate less revenue than expected. We'll have to wait until next August to determine the annual revenue from the tax increase, but few expect that number reach the initial estimate.
There is good reason for skepticism. When Maryland raised cigarette taxes by 100 percent in 2008, cigarette tax revenue only increased by 51 percent in the first year, according to an analysis by the Tax Foundation. This was far lower than was estimated when the tax was imposed. It wouldn't be surprising for something similar to happen with the new alcohol tax.
Lower alcohol sales caused by this tax hike will also affect how much the state collects through its excise taxes on liquor, beer and wine. Yes, the state will raise more money in sales tax revenue, but how much will this tax hike cause it to lose in excise tax revenue?
With alcohol and cigarette tax rates as high as Maryland's, increasing them even further is a highly inefficient way to raise revenue. Yet self-appointed public health advocates don't seem to understand this. They are pushing for the General Assembly to enact higher tobacco taxes next year. If this campaign is successful, we'll surely see them advocating for higher alcohol taxes the following year.
Stores selling liquor and tobacco collect significant funds for the state of Maryland. Besides the usual business taxes, they also pay excise taxes on these products in addition to collecting the special sales tax on alcohol. The goods they sell are the highest-taxed products in the state and bring in over $400 million a year in tax revenue.
For those politicians who like accessing our tax money to spend on their favorite projects, it's shortsighted to drive these stores' customers to other states.